UK Retail – The Price of Change

Knight Frank’s latest ‘thought leadership’ Retail Newsletter, retail sales figures for March from the BRC, full-year figures from Tesco and interim results from Dunelm and ASOS.
Written By:
Stephen Springham, Knight Frank
6 minutes to read
Categories: Retail UK
  • It would be wrong to read too much into the BRC’s retail sales figures for March due to Easter timing distortions. Total sales fell by 0.5% year-on-year, with like-for-likes down 1.1%. Over the three months to March, food sales increased by 1.3% (+0.2% like-for-like) but in-store sales of non-food items declined by 1.5% (-1.7% on a like-for-like). As well as Easter distortions, the BRC also blamed “Brexit uncertainty”…
  • …which was largely refuted by Tesco, the UK largest retailer, who stated that it hadn’t seen a "discernible change in behaviour" from customers and there was “no evidence of stockpiling”, as it reported its FY figures. Tesco’s stunning turnaround continues apace. The business posted a 28.8% jump in pre-tax profit year to £1.7bn, driven by an 11.5% rise in group sales to £56.9bn. Like-for-like sales across the UK and Republic of Ireland increased 2.9%, with Tesco up 1.7% and Booker up 11.1%. Operating margin rose 62 basis points year-on-year to 3.45% and stood at 3.96% in the second half of the financial year – within CEO Dave Lewis’ self-imposed target of 3.5% - 4.0%.
  • Strong Q3 figures from value furnishings retailer Dunelm. The business reported a 12.5% increase in like-for-like sales for the 13 weeks to 30 March. Like-for-like in-store sales rose by 9.8% while online sales increased by 32%. Group revenue increased by 6.1% to £284.5m.
  • With Debenhams and Arcadia hogging most of the headlines, sobering figures from City darling ASOS largely slipped under the radar. The online pure play reported an 87% fall in half year pre-tax profit, despite an increase in sales of 14% to £1.31 billion. The business described its performance as disappointing and that trading had been impacted by a challenging market. A wake up call to those that still think that online is an indestructible force, incubated from all retail malaise.

Stephen Springham, Head of Retail Research:

“Change or die. A simplistic, if slightly over-dramatic, reflection of where the UK retail market is right now. Denial is not an option”.

The opening gambit from out latest Retail Newsletter, which we launched last week (see accompanying link). Under the title of “The Price of Change”, we essentially address the two fundamental questions that everyone is asking of the retail market: why are we seeing so much pain and where do we go from here?

How has it come to this? A host of recent headwinds have laid bare much deeper structural shortcomings that have been 30+ years in the making. Mistakes and neglect from the past have come back to haunt. The change UK Retail is undergoing is structural – permanent rather than temporary.

The rise of online is clearly a key catalyst to this change. Rather than merely supplanting or killing physical retail, online has added huge, almost immeasurable dimension (and complexity) to traditional retailing.

For retailers, embracing this opportunity has proved almost as challenging as the threat it is perceived to pose. Online has not wholly undermined physical retail, but every historic metric and parameter has shifted. And we are only at the beginning of the journey towards understanding what this means in real terms.

The key agents of this change? Consumers, the lords/ladies and masters/mistresses of everything retail. Only by being consumer-centric will retail succeed.

Consumers have embraced online, but are not shunning physical retail. Above all else, consumers are channel agnostic – they shop brands rather than channels. The retail market needs to mirror the thought processes of those that define it, rather than continue to treat channels in isolation.

A first step towards future-proofing UK retail is understanding where it has come from. The past is not necessarily a portent of the future, but lessons can still be learned. Too much retail future-gazing fails to understand many of the fundamentals of retailing that are constants and will not change.

In the report, we identify ‘10 Structural Failings’ of the retail market. The list is by no means exhaustive, nor do all the failings apply to every retailer and landlord. But to play off our theories versus reality, take Debenhams as a highly relevant example. 

The UK retail market is oversupplied and fashion is arguably the most over-supplied sub-sector. Although a department store, Debenhams is overwhelmingly a fashion retailer. It is guilty of historic overexpansion particularly in the early to mid 2000s and has miss-managed its ugly tail of underperforming stores.

Its balance sheet is over-geared, a legacy of its time under private equity ownership. It has evolved to be a multi-channel operator, but the challenge of online has proved difficult to navigate and taken investment away from the core of the business. At the same time, the brand has been devalued by seemingly constant discounting and promotions.

Previous managements could be accused of both under-investment and complacency. But of course, there are other industry failings beyond Debenhams’ control – principally costs rising at a faster rate than sales.

Where do we go from here? Retail property has to change. It has already, but needs to do so at an accelerating rate. In the Newsletter, we highlight six key property pinchpoints– lease terms, incentives, service charges, turnover rents, valuations and business rates - and explore Alternative Scenarios to each.

In very generic terms, the two key watchwords that emerge are flexibility and affordability. The latter concept extending far beyond the recognised, one-dimensional metric of rents.

In compiling the Newsletter, we were delighted to be able to substantiate our own views with those of key industry figures, representing both landlords and retail tenants – Darren Richards of British Land and Frances Baker of River Island. Both offer a very telling, ‘first hand’ market insight on wider change within the retail market.

It would be wrong to view this change as a negative. Retail most definitely does have a future, people will continue to use physical stores in all of our lifetimes. Believe it or not, a high street 20 years from now might not even look radically different from its current incarnation, albeit with a reduced overall retail footprint, a greater sense of purpose and a lot more love.

Change, of course, comes at a price, both financial and figurative and this is the central theme of the Newsletter. However necessary, change can also be painful and difficult to navigate.

There is no silver bullet for UK retail. There may be some quick wins, but the root causes of current malaise are deep and complex. There may not be perfect solutions, but we need better answers than we currently have. And to learn from the mistakes of the past.